Sasol's squeeze for profits chokes SA

July 29, 2008

By Terry Bell

It would be quite laughable, were it not so serious, that government ministers such as the Department of Energy's Buyelwa Sonjica say that they and the administration have their "hands tied" regarding fuel price fluctuations and increases.

The same argument is put forward by Eskom, backed by the government, regarding the need to make consumers pay much more for electricity in order to cover the R300 billion needed for infrastructure development over the next decade.

When, toward the end of last month, Sonjica announced the latest fuel price hike, she excused it by asking: "What can we do?" She then went on to act "decisively" by removing an initially proposed 5.4 cent wholesale margin from the latest overall fuel price increase.

However, being "mindful of crude oil prices" - the reason there may be a slight downward adjustment next month - she still announced price hikes ranging from 63 cents to 75c a litre for various grades of motor fuel and 49c for that cooking and heating essential of the poor, paraffin. Government, the minister maintained, was doing all it could.

But this last statement is only true if the current fuel pricing structure is accepted and if the country has no way of escaping being held to ransom by oil suppliers and the variable and soaring prices on the global oil market.

Taxes can always be adjusted downwards or dropped. Subsidies can also be introduced, although this would not have a major impact on the price of fuel unless it crippled the fiscus in the process.

However, there is Sasol, our much vaunted fuel-from-coal developer and supplier. This company provides anywhere between 23 percent and more than 30 percent of our liquid fuel requirements.

Some estimates put Sasol's contribution to the country's fuel consumption as high as 38 percent of the country's fuel demand, but a Department of Finance task team reported in July 2006 that it was 23 percent or 45 000 barrels of oil per day.

Whichever way it is looked at, this is a substantial proportion of our oil and, therefore, liquid fuel requirement. Sasol also sells this fuel into the local market at the same price demanded for fuel made from imported oil. So it is no surprise that this company - 40 percent of it now owned by investors outside South Africa - records profits of about R100 million a day.

According to the latest estimates, Sasol's accumulated profits for the six years to June 2009 will come in at a whopping R112 billion. The company's annual report forecasts that the net after tax income to shareholders will be R44 billion next year, an increase of R19 billion on the figure for this year.

But these are merely new profit records. Sasol has been reporting massive returns for years.

In its 2006 annual report, for example, it noted that, although it had produced only 1 percent more product, operating profit had increased by 44 percent to R20.7 billion, with R10.406 billion going to shareholders. That was because of the higher oil price, a price which has continued to escalate. It has done so for the basic reason that world demand continues to rise while production has almost certainly reached a plateau - and is poised to decline.

Since 2006, the price has gone still higher - and the profits of Sasol have followed suit. Which is hardly surprising since this coal-to-fuel operation probably produces liquid fuel - petrol and diesel - at the equivalent of anywhere between $15 and $25 a barrel, with most estimates being at the lower level, although the exact figure is a commercial secret.

This was a technology grabbed at by the former apartheid regime when it feared being isolated by the world and possibly having to weather sanctions which would involve oil. So a German-developed technology was imported to South Africa and improved. But despite the improvements, it was still, in the early years, an expensive exercise.



Forty or 50 years ago, oil - which cost no more than $10 a barrel for benchmark crude - tended to be widely regarded as some sort of infinite resource. At that time, oil from coal cost closer to $30 a barrel. That meant massive subsidies, which the apartheid state was prepared to pay to ensure a degree of fuel independence.

But when the state pays subsidies, it is the taxpayers who bear the burden. So for years, taxpayers of this country, across the board, paid to maintain an enterprise that, in market terms, was uneconomic. But it produced fuel. And it did so from a copious natural resource of relatively cheaply mined coal.

Then came 1973 and the now legendary oil price shock. Suddenly, a commodity that had provided cheap fuel to power the industries and motorised vehicles of the world became quite expensive - and promised to be even more costly in future.

By 1979, with steadily rising oil pries established, Sasol became profitable. And with profitability came privatisation, with the state recouping a tiny proportion of the taxpayers' money spent on developing the enterprise. Although the state retained a holding - the Public Investment Corporation and the Industrial Development Corporation still hold, between them, 26.3 percent of shares - a number of shrewd investors set themselves up to make large amounts of money.

Increasingly, in recent years, those investors have come from outside the country. The local holdings of shares in Sasol have shrunk by about 10 percent over the past two years, with 40 percent of dividends now flowing abroad, helping to boost our already frightening current account deficit.

Because of the huge profits accruing to Sasol, Finance Minister Trevor Manuel set up a task team in 2006 to see whether a "windfall tax" on such massive profits should be levied. Such a tax could be used to alleviate poverty and perhaps provide some relief to hard-pressed consumers.

But last year, Manuel turned down this opportunity. He did so on the basis that it would not be "in the interest of a conducive environment for additional investments in domestic fuel security". The fact that future investments by Sasol, like the coal-to-oil plant nearing completion in Qatar, are likely to be outside South Africa, was apparently discounted.

Apart from murmurs in the labour movement, there has also been no mention of possibly re-nationalising Sasol, which, under public ownership was also efficient. But a windfall tax was at least considered - and thrown out.

In the same way, the Treasury discounted calls, mainly from within the labour movement, for the government to step forward with a grant of R300 billion over 10 years to fund the infrastructure requirements of Eskom.

Such money, from state coffers, already comes from taxpayers, the same people who are now being made to pay for the infrastructure upgrade through increased electricity tariffs.

But, as Cape Town tax consultant Desmond Robson points out, making us pay more for electricity will not only result in Eskom receiving its R300 billion, it will also result in the government creaming off another R42 billion in value added tax, since VAT is charged on electricity provision.

Policy alternatives were considered - and choices made. Neither Sonjica, Manuel nor the rest of the government, therefore, have their hands tied when it comes to policy responses.

They have choices, especially regarding fuel prices and funding for electricity infrastructure - and they have made them.

We, as voters and consumers, need to be aware of the available choices in order to decide whether or not they are in our interests; whether they may, perhaps, make the already rich richer at the expense of the poor, or whether they are truly for the benefit of the majority.

Sasol Inzalo

THE INCIDENT I called the Sasol call centre to enquire about shares and was informed that everyone except 'whites' are able to purchase shares. My response naturally was whether this is not deemed *** discrimination to white people? I was told that they have no comment!
When is this nonsense ever going to end?
As a white South African woman, I know what it is like to struggle to get work. I know how difficult it is to immigrate and yet my own country discriminates continuously and has the tenacity to expect different results.
Don't expect to solve the problems created with the same thinking that created them.
As of this moment onwards, I will choose to no longer use Sasol or any of it's outlets for any purpose what so ever.

Sadly South African (no longer Proudly South African)

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SUPPLIER'S RESPONSE
Time: 12:16:50
Fri 11 Jul 08

UPDATED RESPONSE
Time: 13:10:26
Wed 23 Jul 08 Hello bevvan,

Sasol is committed to the transformation of our country and the economic transformation is a critical tool in true nation building. Redressing the past exclusions to ensure an equitable sharing in the economic growth of our country is something that we are proud of. We view transformation as a moral and strategic business imperative and based the Sasol Inzalo transaction on the very clear definitions contained within the Department of Trade and Industry's Black Economic Empowerment codes.

Sasol did not define who qualifies as a "black person." At all times, as we have developed this empowerment transaction, we have been guided by the laws and codes clearly defined by our government. One of the many benefits of a true democracy, is being able to voice one's view and your opinion is noted, through we believe in the potential of what could be achieved with true and remain most proud of our Inzalo transaction.

Regards,
Jacqui O'Sullivan
Sasol Group Communications Manager

Sasol in SA

THE INCIDENT
Sasol please explain to me a South African citizen who has supported your product from day 1.Why I cannot purchase shares, this will be interesting to see your response, you can in no way refer to race, this would be a form of *** discrimination, you cannot claim that I am not from a disadvantage group again discrimination.The Sasol plant was originally financed by the Tax payer, how did you select as your consumer at the time or tax payer?If your company is promoting the growth of the South African economy why is it that the cost of fuel is the same regardless if it’s local or not?Why do you not tell the South African consumer what the true cost is to produce fuel / barrel of refined oil is?I know that if every person in SA whom you have now discriminated against stopped using your product it would make very little affect on Sasol because it is a global commodity. But if we have learnt anything in SA, it’s that people don’t forget and forgive. I will not support your product and I will go to all your service station on Sunday’s and ask if the bikers would not rather go to Total for coffee as there is no *** discrimination who they will sell to.
SUPPLIER'S RESPONSETime: 12:33:16Fri 11 Jul 08
Hello afp Thank you for your comment on Inzalo. It will be forwarded to our head office for feedback.Please take note that all South African fuel prices are regulated by government and not by Sasol. You are welcome to contact the department of minerals and energy for more information.Kind regardsRenée Esterhuizen


THE INCIDENT
Hello Sasol. Thank you for your noncommittal response. As for the fuel regulation within SA. I am aware of this, but I do not see Sasol challenging this, the cost to produce oil vrs retail pump price. If Sasol was truly in favour of supporting SA and the people, they would promote this product and get government to agree to drop the price. By doing so it would benefit SA by bring down (marginally) the living costs for some SA citizens.But let’s agree this would go in the face of the new share which would only favor those that could afford the share in the 1st place. So priority for Sasol.1) The higher the global price of oil the more profit Sasol makes.2) It’s not in Sasol interest to challenge the current legislation on the fuel price. Sasol would rather protect their profit margin they help the SA consumer.3) Sasol would like to portray its image of proudly SA, but has in fact discriminated against a large number of its consumers.4) The direct impact of this share will not be felt by the company Sasol but by the franchisee who own the forecourts.
SUPPLIER'S RESPONSETime: 15:35:01Fri 11 Jul 08
Hello afp We acknowledge receipt of your comments and they will be reviewed by specialists in the particular fields mentioned.A comprehensive response will be posted by next week (latest Wednesday 16 July).Kind regardsRenée Esterhuizen


THE INCIDENT
Good day Renée Esterhuizen.Sorry "my bad", when you stated "A comprehensive response will be posted by next week (latest Wednesday 16 July)." You did not include the year.Silly me to assume it would be this year. Please feel free to request the new bumper sticker.Proudly S.A. and Sasol free
SUPPLIER'S RESPONSETime: 08:52:01Thu 17 Jul 08
Hello afp My apologies for only responding today:In South Africa, the pump price of petrol is regulated by Government and price calculations are done by the Central Energy Fund (CEF) on behalf of the Department of Minerals and Energy.The petrol pump price consists of a number of price elements and these can be divided into international and domestic elements. The international element is based on what it would cost a South African importer to buy petrol from international markets, transport the product to South Africa, insure against losses at sea and include the cost to land the product on South African shores.To arrive at the final pump price in the different pricing zones certain domestic primary and secondary transport costs, government imposts, taxes, levies, retail and wholesale margins needs to be added to the international element.Over and above, Sasol fuel is not cheaper than other fuel because it is actually more expensive to produce fuel from coal than it is to produce it from any other means.


THE INCIDENT
Morning.Renée you have not responded to my question, you have in fact made this issue about the price of petrol.I wanted to understand why I was discriminated against..1) Why could I not purchase shares as a South African citizen, regardless of Race, Religion and my living circumstances?2) What is Sasol doing to assist the general population in SA to overcome the raise in living costs?3) Why have you avoided the question of the tax payer, who funded the plant in the first place?I resent they way in which my queries have been handled, the fact that you have changed the focus of my query. It would have been more to the point if you just stated the obvious.Mr AFP. 1) Your white.. No place for you in South Africa. 2) Your white.. Sasol does not owe you a reasonable response. 3) As long as we “Sasol” can cater for those of colour other than white, who can afforded the shares, why should we care about the general public. So Sasol new slogan should be.. Proudly SA : let’s work together without WHITES. Please do not respond